F A C T S AT A G L A N C E
Disproportionate Share Hospital (DSH) Program:
Your Questions Answered
Prepared by Carey Eskridge
Introduction
The Medicaid Disproportionate Share Hospital (DSH) program was established by the United
States Congress to guarantee that states compensate certain hospitals for providing care to a
disproportionate number of uninsured, indigent, and Medicaid patients. These facilities, commonly
referred to as safety net hospitals, include public and private hospitals, children’s hospitals, university
hospital systems, and long-term mental health care institutions. The DSH program has become a
critical source of funding for the substantial costs of uncompensated care provided by safety net
hospitals.
The purpose of this publication is to help individuals who are unfamiliar with DSH to gain a basic
understanding of the program and how it functions; it is not intended to be a comprehensive resource
for all of the information needed to formulate policy relating to this complex program. This publication
provides brief answers to questions regarding the DSH program, how it is funded, the financing and
basic organization of Texas’ DSH program, disproportionate share hospital eligibility and participation
in Texas, the increased DSH reimbursement rate, the effect of recent federal legislation and rule
changes on Texas’ DSH program, and issues relevant to recommendations made by the office of the
comptroller regarding DSH and the Medicaid upper payment limit (UPL).
Summary
Established in 1981, the DSH program grew in federal and state spending from less than $1 million
to over $16 billion between 1989 and 1993. Because this explosive growth in federal DSH costs was
in part due to some states’ use of creative financing arrangements that exploited DSH to fund the state
share of DSH payments or even finance activities normally paid from the state’s general revenue, a
number of federal laws were passed during the 1990s that placed significant restrictions on states’
DSH programs. Perhaps the most significant of these laws was the Balanced Budget Act (BBA) of
1997, which strictly reduced the federal allotment to states’ DSH programs through a five-year
schedule of reductions.
Texas Legislative Council
March
1 2003
The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) of 2000
provided a two-year reprieve from the BBA reductions, but the scheduled reductions resumed in
federal fiscal year (FFY) 2003. However, the BIPA also increased the rate at which states may
reimburse a public disproportionate share hospital from 100 percent to 175 percent of the hospital’s
uncompensated care costs for FFY 2003 and FFY 2004. This higher reimbursement rate gives Texas
the opportunity to maximize the DSH allotment to state-owned or state-operated hospitals. Because
of the rules governing DSH allotment distribution in Texas’ program, the effect of adopting the higher
reimbursement rate will be a shift in funds away from non-state public disproportionate share hospitals
to state-owned or state-operated public hospitals.
To help affected hospitals recover this loss of DSH funds over the next two years, Texas can
expand its Medicaid upper payment limit plan to compensate hospitals at the Medicare rate for
uncompensated care costs instead of the Medicaid rate.
Questions and Answers About the DSH Program
What is the Disproportionate Share Hospital program and how does it work?
The DSH program reimburses hospitals serving large numbers of Medicaid beneficiaries, uninsured
patients, and patients with no means to pay for care. A state makes a DSH payment to a hospital to
help the hospital cover the additional costs of providing care to Medicaid patients that are not
otherwise paid through Medicaid or the costs of providing care to patients unable to pay. The federal
government then reimburses the state for a portion of the payment made to the hospital.
What control do states have over their DSH programs?
States are given great flexibility in the design of their DSH programs. States, among other things,
determine:
• the total amount of state funds spent on the DSH program
• criteria in addition to federal requirements for determining which hospitals are eligible to
receive DSH payments
• the formula for determining the amount of DSH payments to each hospital
• the distribution of payments among eligible hospitals
• any conditions imposed on hospitals that receive DSH funding
How is the DSH program funded?
The DSH program is a state-federal fund matching program. Disproportionate Share Hospital program
costs are shared by the state and federal governments at the same rate as other Medicaid spending. In
Texas, the rate is 59.99 percent federal funds to 40.01 percent state funds for FFY 2003 and 60.22
percent federal funds to 39.78 percent state funds for FFY 2004. Disproportionate Share Hospital
funds are separate from and in addition to other Medicaid funds received by the state.
How much money does Texas receive for DSH?
The total amount of money contributed by the federal government to reimburse a state for a portion of
the state’s DSH spending is capped by federal law. A state can determine the total amount available
for the state’s DSH program based on the amount of the federal contribution and the state’s Medicaid
matching rate. This combination of federal and state funds is known as the DSH allotment. States can
spend above the allotment but do not draw down federal matching funds on that spending.
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In FFY 2002, Texas had $1.422 billion available for distribution to disproportionate share
hospitals. This amount includes both state and federal dollars (known as “all funds”). The
federal contribution was $856 million, and the state contributed the remaining $566 million.
The projected maximum federal DSH contribution for state fiscal year (SFY) 2003 is $776
million. The projected federal contribution for SFY 2004 will drop to $756 million1 due to
cuts in federal DSH funding from the Balanced Budget Act of 1997.
How does Texas raise the money for its share of the DSH program?
The state share of Texas’ DSH program funds is composed of a combination of money from state-owned
hospitals and intergovernmental transfers from the nine largest public hospitals in the state (eight
hospital districts and one municipal hospital). With the money transferred from the nine largest
DSH-eligible hospitals added to money from state-owned facilities, Texas maximizes the amount
available to be matched by the federal government and therefore available for distribution to
disproportionate share hospitals across the state.
What hospitals are DSH-eligible?
Disproportionate share hospitals (also known as “dispro” hospitals) can be private or public, nonprofit
or for-profit.
• A public hospital is owned, operated, or leased by a governmental entity, including a
municipality, county, hospital district, or the state. State-owned or state-operated hospitals
include state teaching hospitals, such as Texas Tech University Health Sciences Center; state
chest hospitals, such as the South Texas Health Care System; and facilities operated by the
Texas Department of Mental Health and Mental Retardation. Examples of public hospitals
that are not owned or operated by the state are hospitals in the Bexar County Hospital District,
Val Verde Memorial Hospital in Del Rio, and Llano Memorial Hospital.
• Private hospitals can be nonprofit or for-profit. A private, nonprofit hospital must meet certain
community benefit and charitable care requirements that entitle the hospital to certain tax
exemptions (see Subchapter D, Chapter 311, Health and Safety Code). Examples of private
hospitals that receive DSH payments are Baylor University Medical Center in Dallas, Hermann
Hospital in Houston, the Cook Children’s Medical Center in Fort Worth, and Highland Health
System in Lubbock.
Hospitals in Texas qualify for DSH funds in one of three ways. An eligible hospital must have a
disproportionate:
(1) total number of inpatient “days” for Medicaid patients;
(2) percentage of all inpatient days for Medicaid patients; or
(3) percentage of inpatient days for low-income patients.
Texas has designated three University of Texas teaching hospitals and all children’s hospitals as
disproportionate share hospitals provided they meet federal and state qualification guidelines. In SFY
2002, 169 hospitals qualified for DSH reimbursement, with other facilities awaiting determination of
eligibility. Those qualified include:
• 92 public hospitals
• 45 private, nonprofit hospitals
• 32 for-profit hospitals
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What conditions on DSH participation are imposed by federal law?
Federal law requires that states classify certain hospitals as DSH-eligible based on the facility’s
Medicaid inpatient utilization rate or “low-income utilization rate.”2 However, this determination
does not guarantee that the hospital will receive DSH payments.
There are only two federal statutory conditions to qualify for the DSH program:
(1) at least one percent of a facility’s total inpatient days must be attributable to Medicaid patients;
and
(2) if the hospital offers obstetrical services, the hospital must provide at least two obstetricians
with staff privileges who agree to serve Medicaid beneficiaries.
Are there any conditions on participation imposed by Texas?
With certain exceptions for specific types of hospitals, participation in Texas’ DSH program is
contingent on a number of conditions relating to:
• indigent patient eligibility criteria
• the ratio of charity charges to the DSH payment
• posting requirements informing patients of DSH eligibility and available charity care
• DSH funds reporting and records maintenance
• annual assessments of community health care needs with demonstration of DSH fund use
• reports on availability of nonemergency primary care
• active participation in development of regional trauma system
• obstetrical care requirements
• disqualification for certain hospital districts and city/county hospitals whose local revenue
exceeds DSH funds received
How are hospitals reimbursed?
The DSH program in Texas first reimburses hospitals of the Texas Department of Health and mental
health facilities operated by the Texas Department of Mental Health and Mental Retardation at their
adjusted hospital-specific limits. The non-state public and private disproportionate share hospitals are
then reimbursed with the lesser of the remaining annual DSH allotment or their adjusted hospital-specific
limits.3
State-owned teaching hospitals are reimbursed from a separate fund.4
Are there any federal restrictions on the amount of DSH payments to hospitals?
There are two caps on the amount of DSH payments that can be made to hospitals:
• A limit is imposed by federal law on the maximum amount of DSH funds that can be paid to
mental health facilities and institutions for mental diseases (IMDs). Texas’ DSH spending on
IMDs is limited to the lower of the amount spent in FFY 1995 or 33 percent of the DSH
allotment. In FFY 2000, Texas’ DSH spending on IMDs was limited to 19.3 percent of the
total allotment.
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A limit is imposed by federal law on the amount an individual hospital can receive under DSH.
The amount of money a hospital receives cannot exceed the sum of:
(1) the hospital’s unreimbursed Medicaid costs (the Medicaid shortfall); and
(2) the hospital’s uncompensated care costs (meaning the costs of treating
patients without insurance or another means to pay).
Hospitals can be reimbursed for up to 100 percent of the sum of these costs; this is the DSH
reimbursement rate of 100 percent.
What is the “increased” DSH reimbursement limit?
Responding to perceived abuses in some states’ DSH program financing methods, the United States
Congress reduced federal spending for DSH in the Balanced Budget Act of 1997. The Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 provided relief to state DSH
programs from the reductions mandated by the BBA. One way BIPA provided relief was through a
temporary increase in the DSH reimbursement rate from 100 to 175 percent of uncompensated care
costs for SFY 2003 and SFY 2004. The increased reimbursement rate applies to all public hospitals,
including those owned or operated by the state.
What would adopting the 175 percent rate for the next two years mean for Texas?
Taking advantage of the increased DSH reimbursement rate would not affect the amount of federal
funds available for the DSH program.
As discussed above, Texas reimburses state-owned or state-operated dispro hospitals for the maximum
amount allowed by federal law and then distributes the remainder of the allotment to other hospitals.
Adopting the increased rate would shift a larger portion of the DSH allotment from non-state facilities
to state hospitals. The office of the comptroller estimates this would bring in $192 million over the
2003-2004 biennium to state disproportionate share hospitals.
If Texas chooses to reimburse state disproportionate share hospitals at the 175 percent rate, the shift in
DSH funds will decrease the share of DSH funds available to non-state dispro hospitals.
Can the loss to non-state disproportionate share hospitals be mitigated?
Two options available to reduce the potential loss of DSH funds to non-state public hospitals are to:
(1) adopt a broader Medicaid upper payment limit plan; or
(2) weight the formula of DSH funds distribution to the advantage of certain hospitals.
What is the Medicaid upper payment limit (UPL)?
The federal government has allowed states to reimburse hospitals for certain uncompensated care
provided under Medicaid at an amount equal to what Medicare would have paid for the same service,
which is typically a higher amount. This is called the Medicaid “upper payment limit.”
The upper payment limit is financed like all other Medicaid programs, with both state and federal
matching funds. States use intergovernmental transfers to contribute funds for use under UPL.
Does Texas have a UPL plan?
Texas has adopted a limited UPL plan that covers only the urban, public hospital districts in Harris,
Tarrant, Dallas, El Paso, Ector, Lubbock, Nueces, Travis, and Bexar counties that are below the UPL
cap. Texas also makes UPL payments to public hospitals in rural counties with a population of less
than 100,000.
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How does Texas pay for UPL?
Texas provides its UPL contribution to be matched by federal funds through intergovernmental
transfers from the same local hospital districts covered by its UPL plan. The Health and Human
Services Commission reports that these districts received $24.9 million in additional federal funds in
SFY 2001 and $105 million in SFY 2002.
How has federal legislation affected UPL?
Due to perceived abuses of the UPL rule to redirect federal funds to non-health-related programs in
state budgets, the BIPA of 2000 changed the way UPL is calculated. The act instructed the U.S.
Secretary of Health and Human Services and the Centers for Medicare and Medicaid Services (formerly
the Health Care Financing Administration) to publish a rule that would:
(1) establish three separate UPL categories for state-owned or state-operated hospitals, private
hospitals, and public, non-state hospitals; and
(2) set specific transition periods for states to phase out UPL financing arrangements that do not
comply with new regulations, depending on the effective date of the respective state’s program—the
older the program, the longer the period of transition.
Does Texas’ UPL plan comply with the new federal regulations?
Texas’ UPL plan complies with BIPA and federal regulations adopted in 2002 and has gone a step
further to address recent federal government concerns, mandating that all UPL funds received by the
state be used to either enhance payments to hospitals or support medical teaching facilities.
What is the UPL reimbursement rate?
The UPL reimbursement rate is 100 percent of the Medicare payment level. This reimbursement is for
uncompensated costs of providing qualifying inpatient and outpatient services, nursing facility services,
intermediate care facility services for the mentally retarded (ICFs-MR), and clinic services.
How can a broader UPL plan help disproportionate share hospitals?
A broader UPL plan would reimburse as many eligible hospitals as possible, including disproportionate
share hospitals, at the higher Medicare payment level. This could offset some of the loss in DSH
funds created if Texas adopts the increased DSH reimbursement rate.
Federal Legislative Actions Since 1991
The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991
• Texas’ DSH program allotment is capped at $1.513 billion in all funds per federal fiscal year
• changes are made in funding mechanisms used to finance states’ share of DSH program:
provider taxes are restricted, provider donations are prohibited, and intergovernmental transfers
are permitted
• state DSH allotment caps are adopted
The Omnibus Budget Reconciliation Act (OBRA) of 1993
• DSH payments to hospitals are limited to amount of uncompensated care costs
• dispro hospitals are required to serve a minimum of one percent Medicaid patients to remain
eligible
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amount of DSH funds is capped for individual hospitals
effectively shifts distribution of Texas’ DSH funds from state hospitals to non-state local
hospitals, resulting in a reduction of approximately $248 million in DSH payments to state
facilities between SFY 1995 and SFY 2002
The Balanced Budget Act (BBA) of 1997
• federal contributions to DSH programs are limited on a state-specific basis and reductions
scheduled for five years
• federal funds contributed to Texas’ DSH program are reduced from $947 million in FFY 1997
to an expected $765 million in FFY 2003
• DSH payments to institutions for mental disease (IMDs) are reduced and capped at 33 percent
of a state’s DSH allotment
The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) of 2000
• reductions in DSH funds are postponed for two years, until FFY 2003
• DSH reimbursement rate is increased from 100 percent to 175 percent of uncompensated care
costs for FFY 2003 and FFY 2004
• states’ DSH allotments are changed
• DSH allotments for states with extremely low DSH funding are increased
• new rules regarding states’ UPL programs are adopted
• separate UPL categories for state and non-state hospitals are created
• UPL payment rate for non-state hospitals is increased
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Notes
1. Reductions in Texas’ DSH allotment scheduled by the Balanced Budget Act of 1997 are effective
for the first time in FFY 2003. According to the BBA, Texas’ federal contribution for a given year is
calculated by taking the previous year’s allotment (in this case the FFY 2002 allotment set out in the
act) and increasing that amount by the percentage change in the consumer price index for all urban
consumers (CPI-U - all items; U.S. city average) for the previous year. The percentage change in the
CPI-U for 2002 is 2.4. However, the BBA also restricted any states’ DSH allotment from exceeding
the greater of the allotment for the previous year or 12 percent of total Medicaid spending by the state.
2. The low-income utilization rate is unique to the DSH program. The rate is the result of the
following computation: ((Title XIX inpatient hospital payments plus inpatient payments received
from state and local governments) divided by (gross inpatient revenue multiplied by cost-to-charge
ratio)) plus ((total inpatient charity charges minus inpatient payments received from state and local
governments) divided by (gross inpatient revenue)).
3. A hospital-specific limit is the sum of the following: the Medicaid shortfall and the cost of services
to uninsured patients. The adjusted hospital-specific limit is the hospital-specific limit trended
forward to adjust to inflation.
4. State-owned teaching hospitals receive monthly disproportionate share payments based on the
following formula: (monthly charity charges of the state-owned teaching hospital) divided by (total
monthly charity charges of all state-owned teaching hospitals multiplied by available fund). If the
adjusted hospital-specific limit for a state-owned teaching hospital is less than the result of that
formula, the state hospital will receive 100 percent of its adjusted hospital-specific limit.
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Sources
1 T.A.C. Section 355.8065 (1993).
1 T.A.C. Section 355.8067 (1996).
42 U.S.C. Section 1396r-4.
42 C.F.R. Part 447.
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Coughlin, Teresa A., and David Liska. The Medicaid Disproportionate Share Hospital Payment
Program: Background and Issues. Washington, D.C.: Urban Institute, October 1997.
Coughlin, Teresa A., and Stephen Zuckerman. State’s Use of Medicaid Maximization Strategies to
Tap Federal Revenues: Program Implications and Consequences. Washington, D.C.: Urban Institute,
June 2002.
Fagnani, Lynne, and Jennifer Tolbert. The Dependence of Safety Net Hospitals and Health Systems on
the Medicare and Medicaid Disproportionate Share Hospital Payment Programs. New York: The
Commonwealth Fund, November 1999.
Federal Register. Vol. 66, No. 231. Notices. United States Department of Health and Human Services.
“Federal Financial Participation in State Assistance Expenditures; Federal Matching Shares for
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Persons for October 1, 2002 Through September 30, 2003.” Washington, D.C.: November 30, 2001.
Federal Register. Vol. 67, No. 13. Rules and Regulations. United States Department of Health and
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the Medicaid Upper Payment Limit for Non-State Government-Owned or Operated Hospitals.”
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Persons for October 1, 2003 Through September 30, 2004.” Washington, D.C.: November 15, 2002.
Guyer, Jocelyn, Andy Schneider, and Michael O. Spivey. Untangling DSH—A Guide for Community
Groups Using the Medicaid DSH Program to Promote Access to Care. Prepared for the Access
Project, Boston: 2000.
Ku, Leighton, and Edwin Park. Administration’s Regulation to Reduce Medicaid ‘Upper Payment
Limit’ Would Further Worsen State Budget Crises. Washington, D.C.: Center on Budget and Policy
Priorities, December 2001.
National Conference of State Legislatures. Medicaid Upper Payment Limit/Disproportionate Share
Hospital (DSH) Payments. Washington, D.C.: NCSL, March 2001.
Texas Health and Human Services Commission, Medicaid/CHIP Division.
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Speaker Tom Craddick, Vice Chairman
Steven R. Collins, Chief Legislative Counsel/Executive Director
P.O. Box 12128, Austin, TX 78711-2128
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